It’s all about the client - or is it?
Half a lifetime ago I was doing post graduate study in marketing, kicking off with Marketing 101. What I remember of it could be summarised as:
All good product / service / business ideas begin with a customer need
Sales is about selling what you have - whereas true marketing is about creating what customers need and connecting them with it.
Sounds pretty simple, right? Identify what people need, build it, put it in front of them and watch them buy it. What could go wrong!
Turns out its harder than you might think, for a variety of reasons. Some of the largest industries on the planet have struggled to anticipate and respond to client need. Think US automakers continuing to build large and fuel inefficient cars long after the likes of Toyota had pulled their pants down. Consider the abject failure of the residential housing industry to design and deliver affordable, energy efficient homes at scale.
How has the Australian financial services industry scored on the meeting client needs front? Every industry participant will have their own view on this, but in my opinion, and putting a positive spin on it, there is still plenty of opportunity for industry players to differentiate themselves by better meeting client need.
Some areas where our industry could do better include:
Focusing on market risk
We are getting better at this as an industry. The relative focus on market risk as opposed to investment specific risk has shifted in the right direction recent years, but we still have a way to go. If we accept that the majority of variation in portfolio returns is explained by asset allocation, then we should rightfully allocate more of our advice time to that investment decision.
More active management of client portfolios
Again, we are making headway on this issue as an industry, but we are still closer to the beginning than the end of this journey. For many practices, adjusting portfolios is timed to coincide with client reviews, which may not be the optimal time to take action. And for many there is an administrative capacity issue when it comes to how much portfolio reweighting activity they can handle – which then becomes a conflict of interest. The obvious solution is to use a portfolio administration structure, such as a SMA or MDA where the decision to re-weight a portfolio can be made without any negative or positive financial impact for the party making that decision. As an industry we are certainly turning in that direction.
Providing more robust answers to the investor questions; “Am I on track for my goal? Am I going to be ok”?
For financial planners to respond appropriately to this need requires software with sophisticated algorithms that address path dependency, tax, social security, human capital, home equity, non-intermediated investment assets, inflation, changing cash flow requirements and more. All too often, what they get is software that projects at assumed average earning rates, inadequate coverage of real world cashflows and risk and results that are subject to massive and undisclosed variability of outcome.
The reasons why sensible innovations take time to be implemented are too complex to properly explore in this forum, but there is no doubt that good old fashioned inertia is part of it.
One contribution we can all make when seeking to satisfy client needs is to think in terms of “what is the logical and sensible response” and to not be distracted by how different a new way of doing things is from prior practice.
Have a good week.
Brett Sanders